Income And Substitution Effect On Indifference Curve

Suppose the price of x falls so that his new budget line is pq 1.

Income and substitution effect on indifference curve. The substitution effect is explained in figure 12 17 where the original budget line is pq with equilibrium at point r on the indifference curve i 1. The movement from s on a lower indifference curve to r on a higher indifference curve is the result of income effect. But in the case of an inferior product the income effect works in the opposite direction to the substitution effect. A change in the slope of the indifference curve and a change in utility i e.

Thus the movement form q to r due to price effect can be regarded as having been taken place into two steps first from q to s as a result of substitution effect and second from s to r as a result of income effect. Indifference curves income and substitution effects for inferior goods 1. X 2 involved a change in the marginal rate of substitution i e. At r the consumer is buying ob of x and br of y.

In this revision video we work through how to show the substitution and income effects arising from a fall in the market price of a product in our example w. This is different from a change in income which only involves one change a change in. A change from the blue indifference curve to the pink indifference curve. Cheaper lentils income substitution effects this analysis breaks down the effect of a fall in the market price of lentils assumed to be an inferior good into an income effect and a substitution effect nuts lentils ic1 bl1 bl2 a 2.

In this revision video we look at the income and substitution effects for an inferior good.